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Professor recognized for contribution to economic policy


P3020104 (1)_Ken McKenzie Spring 2011.JPG
June 6, 2011

Economics and
School of Public Policy professor Dr. Ken McKenzie says that despite providing generous
tax incentives, until recently Canada has had only mediocre performance in the
area of research and development. In a recent paper, he and co-investigator
Natalia Sershun, MA ‘05 researched the impact of the Canadian tax system on
research and development (R&D). Their efforts were rewarded early this
month with the Purvis Prize, a prestigious award that recognizes a significant
contribution to Canadian economic policy.

“R&D is
a key determinant of productivity, growth and our standard of living,” says McKenzie.
“It is therefore important that we understand the impact of our tax system on
private sector R&D.” 

The key
contribution of McKenzie and Sershun’s study is to make the important
distinction between features of the tax system designed specifically to encourage
businesses to pursue R&D, such as tax credits and fast tax write-offs for
R&D expenditures, which they refer to as the “push” effects of the tax
system, and the general features of the tax system as it relates to the
taxation of the “fruits” of R&D (new products and processes), which they call
the “pull” effects. McKenzie and Sershun developed a theoretical model which
shows that that both features of the tax system should have an important and
distinct impact on R&D effort, and then tested that proposition empirically.

“We found
that tax incentives specifically designed to encourage R&D do indeed incent
more R&D – the push effect,” he says. “Importantly, and in addition, high
taxes on the fruits of R&D under the general tax regime act to discourage
R&D – the pull effect).  Thus, it is
possible that governments can ‘give with one hand’, by providing large tax
incentives for R&D, and ‘take away with the other’, by taxing the fruits of
R&D at high rates.”

McKenzie
says that until recently this typified the Canadian tax system and provides a
partial explanation for Canada's mediocre R&D performance with respect to
other OECD countries despite the presence of one of the most attractive tax
incentive regime for R&D in the world. Recent general corporate tax cuts
that have reduced taxes on the fruits of R&D efforts have led to a more
balanced tax system as it relates to R&D from both the push and pull
perspectives.

This is the
second time McKenzie has won the Purvis Prize. The first time his work was
recognized by the Purvis Foundation was in 2000 for his book Past (In)Discretions: Canadian Federal and
Provincial Fiscal Policy
co-authored with Dr. Ron Kneebone, also of the
Economics department.

The 2011
Purvis Prize winning paper is entitled Taxation
and R&D: An Investigation of the Push and Pull Effects
and was
published in Canadian Public Policy in
September 2010. It is available at http://utpjournals.metapress.com/content/t55p8368m568l4u2/
The prize was presented at the Purvis Lunch at the annual Canadian
Economics Association Conference in Ottawa on June 4.